What is Perpetual Protocol?
Perpetual protocol is a DEX for perpetual futures and leveraged trading. Perpetual offers self-custody for perpetual futures, a product that is unique to crypto and was first introduced by CEXs such as Bitmex and Bybit.
The protocol is relatively new in the world of DeFi. Launched at the end of 2021, Perpetual managed to gather a strong following of crypto traders. As of 2023, the TVL on Perpetual has been consistently above $17M. The two strongest points about the protocol is that no KYC is required and traders remain in control of their funds. Users are no longer bound by CEXs. Instead, they can move their perpetual trading activity entirely on-chain.
Aside from perpetual contracts, Perpetual also offers up to 10x leverage for traders and liquidity providers. Traders can open multiple leveraged positions using the same collateral (cross-margin), or use multiple trading wallets to split their collateral.
Perpetual also has its native token called PERP. Holding the token is not necessary in order to use the DEX. The reason is that PERP is a governance token, which grants voting rights and perks to the Perpetual DAO members.
Perpetual Protocol mainly derives its value from decentralized perpetual contracts. In exchange for the service provided, Perpetual Protocol receives a small fee that goes into maintaining the protocol. Upon consulting with the community, core developers are usually in charge of implementing the protocol upgrades. This ensures Perpetual Protocol stays safe from hacks and the protocol adapts to the market conditions.
As the number of transactions increase, the fees quickly add up. A portion of these fees goes into the protocol treasury, which pays for the developers, audits, and rewards distribution.
Perpetual has an insurance fund to maintain the protocol’s solvency in periods of high volatility. The insurance fund ensures that profitable positions can be paid out in full and liquidated traders do not end up with bad debt. For example, if a trader gets liquidated but doesn’t have enough margin to cover the liquidator fees, assets are drawn from the insurance fund to fill the gap. The insurance fund accrues 20% of the protocol’s trading fees and charges a 5% fee upon successful collateral liquidations.
How does Perpetual Protocol work?
Perpetual Protocol is an on-chain perpetual futures DEX with deep liquidity and builder-ready composability. This makes Perpetual Protocol fit for trading and integrating perpetual futures trading across a wide range of Ethereum-based protocols.
Perpetual is currently on its V2 implementation, deployed on Optimism, which enhances scalability and provides lower gas fees for traders. Perpetual V2 also leverages Uniswap V3’s concentrated liquidity pools to provide trading.
Perpetual Protocol vAMM
One of the key features of Perpetual Protocol is its use of a virtual automated market maker (vAMM) system, which helps to ensure that liquidity is always available for traders. The vAMM system automatically adjusts the price of assets based on the balance of liquidity in the platform's pools, ensuring that traders can always execute trades at fair market prices.
Let's say that a trader wants to buy a perpetual swap contract for ETH/USDT on Perpetual Protocol. The vAMM system first checks the balance of liquidity in the platform's ETH/USDT pool, which consists of both ETH and USDT deposited by liquidity providers.
If the pool is balanced, meaning that there is an equal amount of ETH and USDT, the vAMM system will set the price of the ETH/USDT perpetual swap contract at the spot price of ETH/USDT on the broader market. The trader can then execute the trade at this price.
However, if there is more demand for buying ETH/USDT perpetual swap contracts than there is liquidity in the pool, the vAMM system will automatically adjust the price of the contract to reflect this imbalance. The price will increase, making it more expensive for traders to buy, in order to incentivize LPs to deposit more assets into the pool and balance it out.
Conversely, if there is more liquidity in the pool than there is demand for buying ETH/USDT perpetual swap contracts, the vAMM system will adjust the price downwards, making it cheaper for traders to buy, in order to incentivize more trading activity and balance the pool.
Basically, Perpetual Protocol maintains smart contracts that act as a ‘Clearing House’ and ‘Collateralization Vault’ to enable leverage on both long and short trades. The Clearing House accepts the initial deposits of traders and records the nature of their position (margin amount, direction, and the amount of leverage). Subsequently, the Clearing House sends the deposits to the "Collateralization Vault," which helps backstop and secure trading positions, and notifies the vAMM to update prices.
Perpetual Futures
Perpetual futures are one of the most popular trading products in the crypto space. Initially offered by centralized platforms like BitMEX, Binance, or Bybit, they are now also making they way into DeFi.
Perps allow for gaining exposure to a price of a particular crypto asset without holding the underlying asset. In contrast to standard future contracts, perpetual futures don't have an expiry date, hence they can be held and traded for an indefinite amount of time. Not having a settlement date can be beneficial for traders, as they don't have to deal with multiple contracts as the settlement date approaches.
How to make money on Perpetual Protocol?
Aside from trading perpetuals, Perpetual Protocol offers several, less advanced ways of making money. All you need is an Ethereum wallet like MetaMask and have some funds bridged over to Optimism.
Perpetual Protocol LP
As a liquidity provider, your mission is simple: deposit into a liquidity pool and earn a share of the transaction fees for the respective pool.
Here's how you add liquidity to Perpetual Protocol:
Open the Perpetual Protocol app
Click on the "Pools" tab
Select the asset you would like to provide liquidity for
Enter the amount of liquidity you’d like to provide
Set the price range for your liquidity
Add liquidity and approve the transaction
Whenever you decide to remove the liquidity, the accrued fees will also be added to your wallet.
Perpetual Protocol Staking
Following the governance vote, Perpetual Protocol has enabled a rewards program called Lazy River 2.0, which distributes a portion of the protocol revenue to users who stake their PERP tokens.
Here's how you stake PERP:
Go to token.perp.com
Click "Lock Perp"
Input the amount of PERP you would like to lock and deposit
Approve the transaction
By staking, users receive PERP and USDC rewards from the trading fees.
Price Prediction for Perpetual Protocol — Can it hit $1000?
Buying and hodling PERP — the native token of Perpetual Protocol — is one way of potentially making money on PERP.
By looking at its current price, it’s natural to think about the chance of PERP hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the PERP token by analyzing its tokenomics. PERP’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} PERP tokens being in circulation today, that means a price of {PRICE} per PERP.
How did we come to that calculation? It’s quite easy, the price of a PERP token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each PERP coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of PERP at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for PERP to hit that price.
At a price of $1000 per token, that means the current market cap of PERP would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. PERP’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} PERP which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of PERP? Taking into account the current price of a PERP token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. PERP coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a PERP token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the PERP protocol fully diluted market cap.
These are all crucial details to know when calculating if PERP can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of PERP depends solely on its growth as a network used by tens and hundreds of millions of users.
If you’re looking to add some PERP to your portfolio, the most trusted places to get some are Binance and Coinbase.